Managing and paying your taxes as a sole trader is an ATO requirement and an integral part of trading as a small business or individual in Australia. This guide covers the key tax obligations of a sole trader, including tax rates and when you must file your tax return.
What is the sole trader income tax rate?
Your sole trader tax rate depends on your income and is based on a sliding scale. Like employees, sole traders' tax rates get calculated at the same rate as personal income tax. As your business income grows, so will the tax you must pay.
Here's a breakdown of Australia's resident tax rates (these don't include the Medicare levy of 2%):
0 – $18,200 - Nil
$18,201 – $45,000 - 19c for each $1 over $18,200
$45,001 – $120,000 - $5,092 plus 32.5c for each $1 over $45,000
$120,001 – $180,000 - $29,467 plus 37c for each $1 over $120,000
$180,001 and over - $51,667 plus 45c for each $1 over $180,000
Note: These rates will change from 1 July 2024. Consult the ATO for the latest tax rates.
When do sole traders need to lodge an income tax return?
Sole traders must lodge a tax return yearly, even if your income is below the tax-free threshold. Tax returns are due by 31 October for sole traders unless you lodge through a registered tax agent.
What are the key tax obligations of a sole trader?
The key tax obligations of a sole trader include:
Obtaining and using an Australian Business Number (ABN) for all business-related activities
Obtaining and using an ABN for all business-related activities is a legal requirement for all sole traders. An ABN is a unique 11-digit number that helps identify your business and helps you claim goods and services tax (GST) credits.
Registering for an ABN through the Australian Government's Business Registration Service is free. Make sure you have all the ABN necessary information before submitting your application.
Using your individual tax file number (TFN)
Your individual tax file number (TFN) is another part of lodging a tax return. A TFN is a unique 9-digit number you keep for life. It's a personal reference number that the ATO uses to track your tax and employment history. You can apply for a TFN or find your TFN through the ATO's website.
Report all business income in your individual tax return
You must report all business income in your individual tax return using a separate business schedule. Also, include any business expenses you can claim and any other income. You don't have to work out the amount of tax you're liable to pay, and you don't need to lodge a separate tax return for your business.
Register for GST if your yearly GST turnover is $75,000+
You'll need to register for GST when your yearly GST turnover or projected GST turnover is over $75,000. Registering for GST is voluntary if your annual turnover is below that threshold. But once you hit $75,000, you must register within 21 days.
Pay tax on all income
You need to pay tax on all income. Once you've lodged your tax return, the ATO calculates whether you owe tax or are entitled to a refund. You must pay any tax owing 21 days after receiving your assessment notice and you can pay with BPAY or a credit/debit card.
You might need to prepay tax using PAYG instalments
You might need to prepay tax using Pay As You Go (PAYG) tax instalments. This scheme allows sole traders to pay tax quarterly instead of annual lump sum payments.
You can voluntarily choose to enter the PAYG system, or you might get added automatically if your income meets all the following:
Instalment income from your latest tax return of $4,000 or more
Tax payable on your latest notice of assessment of $1,000 or more
Estimated (notional) tax of $500 or more
You might need to lodge business activity statements (BAS)
You might need to lodge a Business Activity Statement (BAS) too. When you register for an ABN and GST, the ATO will automatically send you a BAS when it's time to lodge. The ATO uses your BAS statement to work out your GST refund or bill and PAYG instalments.
Claim deductions for personal super contributions
If you choose to contribute to your super fund directly, you can claim deductions for personal super contributions. To claim a deduction, you must give your super fund a notice in the approved form and get their acknowledgement. You must also meet other eligibility criteria.
Sole trader superannuation isn't compulsory, and personal contributions are subject to the contributions caps that apply to concessional and non-concessional contributions.
If hiring employees, you need to meet all employer and super obligations for them
If you're hiring employees, you need to meet all employer and superannuation obligations for them, too. As an employer, you're responsible for paying employees the correct wages, superannuation contributions and entitlements, and registering for and paying PAYG withholding tax on their behalf.
Tax differences between a sole trader and a company
There are several tax differences between a sole trader and a company, including:
Tax-free threshold
The tax-free threshold for a sole trader is $18,200. There's no tax-free threshold for companies — you must pay tax on every dollar your company earns.
Tax rates
The tax rate for sole traders is based on Australia's resident income tax rates. The full company tax rate of 30% applies to all companies not eligible for the lower company tax rate.
Lodging tax returns
Sole traders and companies lodge tax returns yearly – sole traders submit individual tax returns, and companies submit company tax returns. If you're a director or employee of your company, you must also lodge a personal tax return.
How to manage your taxes as a sole trader
You can manage your taxes as a sole trader by yourself, using accounting software, working with an accountant – or combining all three.
Keep track of your business income and expenses
Keeping track of your business income and expenses is critical to managing your taxes as a sole trader. An easy way to digitally keep these records is with the myDeductions tool – an ATO app feature.
Employ the assistance of accounting software
The assistance of accounting software is another way many sole traders choose to manage their taxes. With MYOB's cloud-based accounting software, it's easy to capture your income and expenses, giving you an accurate view of your cash flow. When you need to lodge a tax return, BAS or GST return, you can send the information directly to the ATO from MYOB.
Use an accountant
An accountant can help relieve the pressure on sole traders who manage their own taxes. If you're using MYOB's accounting software, you can invite them to your software so they can access the information they need to lodge your returns and give you advice on sole trader tax deductions.
How to prepare and lodge a tax return as a sole trader
Ready to prepare and lodge a tax return as a sole trader? Here are the steps you'll need to follow:
Calculate your total business income for the year
Calculating your total business income for the year is the first step in lodging your sole trader tax return. The ATO may pre-fill some of this information, but you can also use the myDeduction tool to keep track of your business income throughout the year.
Calculate all your tax-deductible business expenses
Calculating all your tax-deductible business expenses can help reduce your tax liability. For example, you may claim deductions for operating expenses like rent, vehicle or travel.
Create a myGov account and link it to the ATO
To create a myGov account and link it to the ATO, follow these steps:
Collect the information you need to link your myGov account to ATO's online services.
Sign in to your myGov account and follow the prompts to link it to the ATO. This will include answering two questions about your tax record.
Watch the ATO's video on how to link your myGov account.
Fill out your tax return
You can fill out your tax return online with myTax, using a paper form or through a registered tax agent like an accountant or bookkeeper.
Hire an accountant to prepare and lodge your tax return on your behalf
Many sole traders hire an accountant to prepare and lodge their tax returns. Aside from it being one less thing you need to worry about, a registered tax agent can help you stay compliant (so you meet all your tax and ATO obligations) and find ways to reduce your tax bill.
Sole trader tax FAQs
Can a sole trader lodge their own tax return?
A sole trader can lodge their own tax return online with myTax. First, you'll need to create a myGov account and link it to the ATO. From there, you can lodge your tax return on a computer, smartphone or tablet – without downloading any software.
Watch the ATO's video on how to lodge a tax return with myTax.
How does PAYG work for sole traders?
The Pay As You Go (PAYG) system allows sole traders to pay their taxes quarterly instead of as a lump sum at the end of the financial year.
In your first PAYG year, you'll need to estimate your expected income and nominate an instalment amount to pay every quarter. In the next financial year, the ATO will use your income from the previous year to estimate the amount of tax you must pay in each PAYG instalment moving forward.
Should I pay myself a wage and superannuation as a sole trader?
As a sole trader, whether you pay yourself a wage and superannuation is up to you. Unlike an employee under a traditional PAYG setup, sole traders don't need to pay themselves for superannuation. However, making personal contributions will help you reach your retirement goals – and you may even be able to claim a tax deduction.
Sole traders – you don't have to manage your taxes alone
With MYOB's accounting software for sole traders, you can ditch the spreadsheets and automate all your income and expense tracking tasks. You can create invoices and track who has (and hasn't!) paid.
When you make a business purchase, snap a photo of the receipt, and we'll add all the essential details to MYOB. This means that during tax time, you can download or lodge the data directly with the ATO, saving you time and minimising the number-crunching.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation including filing your BAS return or annual tax statements then you should consult with your accountant or other registered tax adviser.